New research shows that more than a third of contractors have left self-employment because of changes to off-payroll working (IR35) rules.

A survey published by the Association of Independent Professionals and the Self-Employed (IPSE) shows that 35% of contractors no longer work for themselves.

Many former contractors have found permanent positions, while others have retired, started working overseas or simply stopped working. This figure does not include contractors that started working through umbrella companies.

Umbrella workers are legally employed by an umbrella company. As umbrellas operate PAYE payroll, this means they are unaffected by IR35 rules, as well as some of the administrative headaches that come with running your own limited company.

Of the contractors that remained in self-employment, IPSE’s research found that 34% are now working through an umbrella company, while another third have taken on ‘inside IR35’ contracts.

Working ‘inside IR35’ means that contractors pay tax and National Insurance contributions in the same way as employees. They do not, however, enjoy the same rights as employees, as they would working through an umbrella.

Four out of five contractors (80%) working inside IR35 said they had seen a drop in their quarterly earnings. The average earnings drop was 30%, but a quarter of respondents said that their income had dropped by more than 40%.

IPSE’s research also seems to point out widespread failures in the application of IR35 rules.

Since IR35 rules changed in April this year, private sector companies over a certain size have been made responsible for judging a contractor’s IR35 status. As part of this process, they are required to give contractors a Status Determination Statement (SDS) to confirm IR35 status, but 28% of the respondents to IPSE’s survey said their clients had not done this. 

One in five (21%) contractors said their clients had also blanket assessed all engagements as inside IR35, while one in ten (11%) said their clients had blanket banned contractors altogether.

Andy Chamberlain, Director of Policy at IPSE, said: “Contractors are the most productive part of the crucial self-employed sector, which overall contributes more than £300bn to the UK economy every year. Not only that: they are absolutely vital for economic recovery, providing invaluable flexible skills to businesses getting back on their feet and adapting. But just when this sector is needed most, it has been hamstrung by the changes to IR35.

“This research shows the devastating impact the changes to IR35 have had on contractors, needlessly compounding the financial damage of the pandemic and the unnecessary gaps in support. Now, just when contractors are needed most – amid mounting labour shortages across the UK and particularly in haulage – government decisions have driven out a third of the sector.”

Miles Grady, Director of Umbrella.co.uk, said: “Rightly or wrongly, since April we’ve seen a very high proportion of contractors labelled as ‘employed for tax purposes’. Many have challenged their classification, but while a few have been successful, many more have been knocked back.

“Looking out for outside IR35 contracts will be the best course of action for some contractors. But these look to be increasingly rare. If you are a contractor that’s only finding inside IR35 opportunities, I would strongly encourage you to explore umbrella employment.”

For more information about contracting, IR35 and umbrella employment, speak to a member of the www.Umbrella.co.uk team today. Call: 0800 121 6513.